To make home loans cheaper, the RBI said it will rationalise the risk weights and link them to loan-to-value (LTV) ratios for all new home loans sanctioned up to March 31, 2022.

In its Statement on Development and Regulatory Policies issued on Friday, the Reserve Bank of India (RBI): “In recognition of the role of the real estate sector in generating employment and economic activity, it has been decided to rationalise the risk weights and link them to LTV ratios only for all new housing loans sanctioned up to March 31, 2022. This measure is expected to give a fillip to the real estate sector.”

“Rationalising risk weightage on home loans and linking it to Loan to Value (LTV) ratio will effectively result in higher credit flow to the real estate sector, which is positive news for the sector,” a media report quoted Dhruv Agarwala, group chief operating officer (CEO) of, and as saying.

The report quoted Hardayal Prasad, MD & CEO, PNB Housing Finance, as saying:  “This move by the central bank addresses the urgency required to boost the real estate sector in the country. Home loans will become accessible and competitive for the customers.”

Loan-to-Value (LTV) ratio refers to the proportion of the property value that a lender can borrow through a loan.

Lenders set the LTV ratio for a loan applicant after factoring in his credit profile and the regulatory caps for the concerned loan type set by the regulator.

The report quoted Nishant Singh, partner, IndusLaw, as explaining that if a bank underwrites a home purchase of Rs 1 cr wherein a home buyer foots Rs 20 lakh and the bank chips in Rs 80 lakh, then, the LTV would be Rs. 80 lakh (loan value) divided by Rs 1 cr (cost of the home purchased).

“So, the LTV would be 0.8. If the LTV increases, the bank’s risk exacerbates,” Singh said.

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